What is a MYGA? Multi-year guaranteed annuities vs CDs

A MYGA is a type of fixed deferred annuity. You give an insurance company a lump sum. It promises you a set interest rate for a set number of years, often called the guarantee period. When the term ends, you can usually take your money, renew, move it to another annuity, or turn it into income.

It works a lot like a CD. The big differences are the backing, the tax rules, and what it costs you to leave early. A MYGA is different from a fixed index annuity, whose credits follow a stock index. For that comparison, see Fixed index annuities explained.

You may be searching for MYGA rates. We don't publish rates. They change often, they differ by insurer on the same day, and a list here could be out of date by the time you read it. Ask for the current rate in writing, along with the surrender schedule, before you buy.

What drives the rate you're offered? Mainly the level of interest rates in the wider economy when you buy, the length of the term, and the insurer's own pricing. Compare the surrender period and any market value adjustment along with the rate. Your guarantee depends on the insurer's financial strength and claims-paying ability.

Here are the main differences. Terms vary by contract and bank, so check your actual disclosure.

If you worry about a bank or insurer failing, know that they are protected in different ways. A CD at an FDIC-insured bank is backed by the federal government up to $250,000 per depositor, per bank, per ownership category. IRAs fall in their own category. So your IRA CD can be covered on top of your regular accounts at the same bank.

A MYGA is not FDIC insured. Its guarantee depends on the financial strength and claims-paying ability of the insurance company. If an insurer fails, the guaranty association in the state where you live steps in, up to a limit. NOLHGA is the national group of these associations. It says most states cover $250,000 of annuity value. Some cover more, such as Connecticut, New York, Utah and Washington at $500,000.

You may plan to put more than your state's limit into annuities. If so, some people split it among insurers. Check the insurer's financial strength ratings and your state's limit before you buy.

Outside a retirement account, your CD interest is generally taxed every year as it is credited, even if you leave it in the CD. MYGA interest grows tax-deferred. You pay tax only when you take money out. Your gains come out first and are taxed as ordinary income.

Deferral helps you most if your bracket is higher now than when you will take the money. It also helps if you plan to keep deferring. You can do that by moving to another annuity at the end of the term through a 1035 exchange. It helps less if you will cash out in a single year, since a large lump of interest can push you into a higher bracket.

Inside your IRA, 401(k) or Roth IRA, there is no difference. FINRA notes that an annuity in an IRA adds no extra tax advantage. In that case, compare rate, term, safety and access only.

With a CD, the bank sets the early withdrawal penalty, often a few months of interest. The OCC says federal law sets a minimum penalty but no maximum. So a steep penalty could eat into your principal. Read your account agreement.

With a MYGA, the insurer charges a surrender charge on amounts above the free withdrawal amount, if your contract has one. Some MYGAs also apply a market value adjustment. That can lower your value if rates have risen since you bought. Both are explained at Annuity surrender charges.

For most people, leaving a MYGA early costs more than breaking a CD. The flip side is that many MYGAs let you take a yearly free withdrawal, often up to 10%. Most CDs do not.

Yes. You may convert part of your traditional IRA each year and want that money in something that can't drop with the market. A MYGA held in your Roth is one option. A CD held in your Roth is another. Inside a Roth, the MYGA's tax deferral adds nothing, so compare them on rate, term and backing.

Match the term to when you might need the money. If you are under 59½, each conversion has its own 5-year clock for the 10% penalty. Your Roth earnings also need the account to be open 5 years to come out tax-free. See The 5-year rules.

If you convert each year, ask whether the MYGA accepts added deposits. If not, each year's conversion may need its own contract. Your MYGA may instead sit in your traditional IRA, and you convert it in pieces. Then a partial conversion may count as a withdrawal and use up your free amount. For that approach, see Roth conversion with an FIA.

A MYGA can make sense if you are over 59½ and want tax deferral and a fixed rate outside an IRA. It is for money you are sure you won't need for the whole term. It can also make sense in your IRA or Roth if its rate beats CDs for the same term, once you weigh the different backing.

A CD is usually the better fit for you in these cases:

• You may need the money before the term ends, or this is your emergency fund.
• You are under 59½ and would take the interest out early.
• You want federal deposit insurance and would go over your state's annuity guaranty limit.
• You want a short term, such as one or two years.
• The CD rate for the same term is close to the MYGA rate, so the extra lock-up isn't worth it.